The State of Crypto Regulation in the United States: Part 1
This is part of our blog series on how governments around the globe have evolved their position on cryptocurrencies over the last decade. Check out our posts on China here.
The US dollar has prominently served as the world’s reserve currency since the first half of the 20th century. The currency’s omnipresence is undeniable, with both local and foreign banks stockpiling banknotes to maintain liquidity and satisfy demand. While cryptocurrencies like bitcoin aren’t as widespread yet, they have arguably posed a bigger challenge to the dominance of the US dollar than any other central bank-issued currency in the world.
Unlike fiat currencies, bitcoin is not bogged down by ineffective monetary policy, spiralling debt, excessive government spending, or even malignant administrations. In crypto, code is law and the users are in charge.
The crypto market is valued at $240 billion today, with bitcoin alone commanding a valuation of $160 billion. What’s more impressive, however, is the fact that the crypto asset class has achieved this feat within a mere decade. A host of non-currency use cases have also emerged surrounding blockchain, making the technology valuable across industries. These developments have allowed crypto to thrive and become a legitimate asset class.
### Early Crypto Regulation: Fragmented and Flawed
The cryptocurrency market first appeared on US regulators’ radars after darknet markets such as Silk Road began using bitcoin as a payment method back in 2013. This prompted the Securities and Exchange Commission (SEC) to recognize digital currencies as ‘property’ for tax purposes.
The SEC went on to release an advisory in 2014 citing various crypto-related risks, including its volatility, lack of government-backing, and security concerns. It also pointed out how the infamous Mt. Gox bankruptcy left many investors without their bitcoin, and without any legal recourse for recovery. Notably, though, the SEC did not reveal any long term plans for regulating the crypto market.
For several years, the bureaucracy was the primary factor holding back crypto regulation in the US. Between the Internal Revenue Service (IRS), Securities and Exchange Commission, and the Commodity Futures Trading Commission (CFTC), the US was unable to create laws for such a diverse and new asset class.
Regulator miscommunication is also what led to New York’s BitLicense, which was one of the earliest attempts to regulate the crypto market. The regulation was controversial for many reasons, amongst others privacy concerns for consumers. Crypto companies complained about onerous compliance requirements for businesses. When implemented in 2014, BitLicense ultimately triggered a mass exodus of crypto companies from the state of New York, including LocalBitcoins, Poloniex, and Bitfinex. As of late 2019, the NYDFS was believed to be working on updates to BitLicense.
### Attitude Shift: Institutional Investors Pick Up Crypto
Today, American regulators have been forced to take a second look at bitcoin and other digital currencies because of the opportunities offered by blockchain technology. The US now risks losing out to other markets in terms of innovation, wealth, and job creation. After all, a significant chunk of the country’s global financial dominance can be attributed to its first-mover advantages in several industries.
While South Korea and China dominated the cryptocurrency landscape in the market’s early days, the tide is shifting. After China banned digital currencies altogether in 2017, American investors have stepped up in droves.
Wall Street, a long time sceptic of the crypto industry, has also deployed a wave of institutional wealth into the crypto market. In 2020, big players, including hedge funds, university endowments, and pension funds, have started to add crypto to their portfolios.
Stay tuned for our follow up article in this series on crypto regulation in the United States where we explore this shift in greater detail.
*Special thanks to Rahul Nambiampurath for his valuable contribution to this post.*
